Venture Corporation - Re-rating from consistent revenue growth

Favourable SGD/MYR movement to benefit the bottom line; Upgrade to BUY with TP of S$ 10.90.

Consistent revenue growth over the past 12 quarters.

Math works in Venture Corporation (Venture)'s favour as growing segments comprise over 40% while shrinking segments comprise only 11% of the total business.

Venture's exposure to growing segments such as Test, Medical and Life Sciences segment coupled with the fact that Venture has added 100 new customers over the last six years (33% of its customer base) is likely to keep the momentum going.

3Q16 net profit was 10% above our expectations.

Net profit of S$47.4m (+17% y-o-y, +9% q-o-q) was above our ~S$ 43m estimate due to strong improvement in gross margins. This was mainly due to favorable business mix.

Revenue also saw steady growth reaching S$ 705.7m (+2% y-o-y, +3% q-o-q), due to the strong growth seen in the Test, Medical and Life Science segment which contributed 44% of the top line compared to 42% in 2Q16 and 39% in 1Q16.

Stronger SGD vs MYR to benefit earnings.

Our in-house forecast suggests that SGD/MYR rate will hover around 3.25 in FY17, up from 2.82 earlier. As bulk of the labour costs are sourced in Malaysia, this should benefit Venture’s margins despite higher foreign worker levies.

We estimate that a 2% rise in SGD/MYR will have a 1.5% positive impact on Venture’s earnings.

In light of improving margins and stronger than expected top line performance, we revise our earnings forecast upward for FY16F/17F by 6%/9%.

Valuation

Upgrade to BUY with a revised TP of S$ 10.90. Our TP is based on 16x FY17 PE, which is +1 s.d. of its historical mean PE.

We adjusted our target PE by +1 s.d. to 16x from 15x earlier as we expect the market to re-rate Venture following 11 consecutive quarters (y-o-y) of steady revenue and profit (exceptional) growth.

The counter also offers a dividend yield of 5.3% at the current price.

Key Risks to Our View

Weakening global growth prospects. As Venture has exposure to the US, EU and Asia, a broad global slowdown is likely to impact Venture due to its vulnerability to business cycles.

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